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Covid-19: Pak GDP growth forecasts and KSE-100 index target lowered

Please find attached our 40-page detailed analysis about the impact of Covid-19 on the Pakistan Economy, and its subsequent effect on the Pakistan stock market.

 

(Apr 04, 2020)

 

• The coronavirus outbreak is first and foremost a human tragedy, affecting hundreds of thousands of people. It is also having a growing impact on the global economy including Pakistan.
• While early days, we believe Covid-19 will not just have short-term repercussions but medium term implications on Pakistan economy that was just starting to recover after two years of slowdown.
• Like several other countries, Pakistan too has announced a lockdown since third week of March-2020 and will continue till April 14, 2020. It will most likely be extended considering the rising Covid-19 cases and deaths. Though so far the mortality ratio in Pakistan is on the lower side at 1.4% compared to world average of 5.2% so far.
• Based on different studies and analysis, we have built in 6 weeks of severe lockdown till end April, and after that gradual lifting of restrictions over next 2 months with state starting to normalize post June.
• We estimate the lockdown related disruptions and subsequent fall in aggregate demand because of Covid-19 are likely to result in GDP contraction of 6-8% YoY in 4QFY20 mainly due to fall in industrial production. While Pakistan does not report quarterly GDP figures, we have conducted this analysis considering the huge impact of lockdown on economic activities.
• It will result in Pakistan reporting 0.0-0.5% YoY GDP growth in FY20E, where in the worst case scenario Pakistan’s economy can shrink by 0.5-1.0% YoY, which will possibly be the first time in Pakistan’s 72-year history. However, in FY21F we expect GDP growth to recover to 3.5%.
• Due to lockdown and govt. relief measures we estimate Pakistan’s fiscal deficit to shoot to 9.0% of GDP in FY20E and subsequently clock in at 8.0% of GDP in FY21F. This will result in three consecutive years (FY19A-21F) of 8.0% and above fiscal deficits, seen only during FY86-88 in Pakistan previously.
• We also foresee Balance of Payments problems over the next 3-12 months (even though Current Account balance will be more than manageable), if Pakistan is unable to muster reasonable support of the IMF, multilateral agencies and friendly countries.
• We believe Pakistan will renegotiate IMF loan program due to the extraordinary circumstance because of the Covid-19 outbreak.
• As a result of the mentioned Balance of Payments issues, we have revised our PKR/USD assumption for June-2020 to Rs170 (from Rs158) and for June 2021 to Rs180 (from Rs165).
• Falling commodities prices will help in easing inflation to 11.1% in FY20E and 8.2% in FY21F. Considering fiscal situation and falling PKR, we have not assumed further policy rate cut in 2020
• We lower our KSE-100 Index target to 38,500 by Dec-2020 – an upside of 25% from April 2, 2020 closing.
• The PSX trades at 2020E P/E 5.8x (ex E&P at 7.0x), where we believe cherry picking will be crucial in unlocking returns – which is at a discount of around 60% to MSCI EM (Asia) compared to its historical discount of about 40%.
• We believe the overall impact on the economy due to the Covid-19 will be felt across the corporate sector, in one way or the other. However, there may be a varying level of impact. We lower our earnings growth estimate for 2020E from 16% in Dec-2020 to -3%.
• We are Over-weight on Oil and Gas Exploration, Cements and Fertilizers, Market-weight on Banks, Power, OMCs, Steel, Chemicals and Pharmaceuticals and Under-weight on Automobiles, Gas Utilities and Insurance.
• We particularly like high D/Y stocks in current scenario. Our preferred plays are OGDC, POL, MARI, MCB, MEBL, ENGRO, FFC, LUCK, KOHC and HUBC.